When new firms are created or registered, more people are employed

This page summarises evidence showing the effects on employment when new firms start or are formally registered, which can be facilitated by simplified business registration procedures, and possibly, entrepreneurship training.

One evaluation tracked the results business registration reform programme on firm creation and through to employment, finding positive impacts in the industries targeted.

  • Bruhn (2011) finds that the Mexican Rapid Business Opening System programme led to a 5% increase in the creation of new firms, exclusively because former wage earners opened businesses. For those unemployed or out of the labour force the likelihood of finding work as wage earners increased after the programme was introduced, and overall employment in the industries targeted by the programme increased by 2.8%.

There is also a cross-country study, which indicates that small young firms have particularly high job creation rates.

  • Ayyagari, Demirguc-Kunt and Maksimovic (2014) study the role of small and medium enterprises in job creation in 104 developing countries. While large mature firms have the largest employment shares, small young firms grow the fastest and have higher job creation rates.As such, the authors emphasise the importance of encouraging entrepreneurship and reducing constraints to starting up new businesses.

A common bias in studies measuring the employment impact of start-ups is that they only measure the employment impacts of those firms that survive in the short term. In practice, failure rates are often high, leaving owners and employees without work. One study suggests though that employment growth in surviving firms may offset the loss from other firms that exit the market:

  • Bartelsman, Haltiwanger and Stefano (2004), find that new firms which survive for several years may generate more than enough employment to provide jobs for employees and owners of failed businesses. In Mexico, for example, about 27% of new firms survived seven years after entering the market; these surviving firms employed more than 105% of the number of workers originally employed by all new entrants in their cohort.